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Abstract: The process of innovation is driven by two main factors: new inventions and institutions supporting the transformation of inventions into marketable innovations. This paper proposes a new institution, called a semi-public contest, that has been neglected by the economic literature but exists frequently in practice. I show how semi-public contests can mitigate a dilemma that arises at a very early stage of innovative activity and specify the general requirements for situations in which a semi-public contest can increase welfare. This paper's results suggest that governments promote knowledge about the semi-public contest mechanism but refrain from direct public funding of contests.